Everyone agrees that U.S. equities are at least fully valued, and next to other developed markets they look overvalued. But America is well-represented, some think overrepresented, in a handful of growth industries where companies command lofty price-to-earnings multiples, according to T. Rowe Price’s senior portfolio manager Robert Sharps.
In industries like e-commerce, bio-pharma, social media and software, U.S. companies like Facebook, Amazon, Gilead Sciences and Google face very limited foreign competition. Sharps noted that these sectors accounted for most of the sizzle in the U.S. bull market over the past several years.
This explains why since 2010 the Russell growth index has outperformed the Russell value index by 50%. Over the last year, gains in U.S. equities have been “harder to come by” as a handful of high-flyers have dramatically outperformed the broader market, Sharps remarked yesterday at a press briefing.
Some market watchers think narrower leadership can be a sign of a market top. “Valuations in the aggregate are not prohibitively expensive,” Sharps said, adding that before the terrorist attacks in France last Friday, T. Rowe Price was favorably disposed to European equities.
Part of the reason is that Europe remains in a much earlier stage of recovery from the financial crisis. But when it comes to European valuations, slow-growth industries like telecom, utilities, banking and energy account for a much greater percentage of the major indexes than they do in America.
BP, for example, is the largest company in the United Kingdom, while Royal Dutch Shell is the Netherlands’ biggest company. In the U.S., Apple, Google and Microsoft sport significantly larger market caps than Exxon, which currently is almost the same size as Berkshire Hathaway and only slightly ahead of Amazon, General Electric, Facebook and Wells Fargo.
Sharps added that he didn’t see indications of late-cycle excesses or manic behavior. “Next year feels a little better,” he said.